Once upon a time, citizens of Ukraine were tolerant of the corrupt economic “co-dependency” between Ukraine and Russia. But something happened to rile the normally placid citizens of Ukraine. I’ll give you a hint: Ukraine did not invade Russia.

One year ago in the south and east of Ukraine, Russia was widely admired and its leadership generally respected. In Ukraine overall, 43% approved of Russia…. What a difference a year makes! Now 95% of Ukraine is opposed to Russia, and these newer negative views of Russia are likely to last at least a generation.

Too bad. Russia could use some friends in Europe right about now. In fact, Russia could use friends anywhere it might find them.

Russia’s financial crisis has seen the Russian equity market’s total capitalization plummet to $345.9 billion from $647.4 billion, as measured by the RTS index. That makes all the country’s public companies together worth about as much as Google, valued at $349.1 billion, and less than Apple, Microsoft, Exxon Mobil or Berkshire Hathaway. __ Bloomberg

Russia’s vaunted foreign reserves are not as ample as they are made out to be.

“Russia appears to have $380-$400 bln of reserves”.

“Not all of these are liquid. Many in the blogosphere heralded Russia’s purchases of gold as a way to diversify away from fiat currencies. Russia has more than 10% of its reserves in gold and it is cumbersome to use to intervene or to offset a currency mismatch. Of course, it earns no yield either. Another $170 bln of reserves are part of the two sovereign wealth funds Russia has established. These investments might not be particularly liquid either”.
__Marc Chandler

Putin is already dipping into the $170 billion sovereign wealth funds to help miscellaneous obligations. He may regret putting so much of his rainy day funds into illiquid assets before the drawdown is completed.

Russia is likely to have three options early next year it can choose from — capital control, a moratorium or default. Russia is expected to declare a moratorium if its control on capital flows does not work, analysts said.

“If Russia’s currency woes spread to other emerging markets such as Brazil, Indonesia, Thailand and Venezuela, there could be a much bigger banking crisis in Asia, ___Korea Times

Other observers are worried that Putin may choose a fourth option: an expanded shooting war.

Though no one is suggesting war is right on the horizon, it is not far from everyone’s mind, because few see President Vladimir Putin backing down from the West.

Ian Bremmer, the president of the Eurasia Group, a political risk and consulting firm said: “I do not expect him (Putin) to blink.”

The economic realities of the post-Ukraine flareup are startling.

At the beginning of 2014, Russia was the world’s eight-largest economy. Its gross domestic product was $2.1 trillion.

Now it is the 15, tied with Mexico and Indonesia. A single ruble is worth less than two pennies. Since January of this year, the value of Russia’s currency has been halved.
___ News Consortium

Russian billionaires have lost over $60 billion this year. Capital flight from Russia is estimated to be between $100 bln and $200 bln this year alone. Russia’s banks have had to spend tens of billions of dollars trying to stabilise the rouble, and may have to spend another $100 bln in the next several weeks unless the Kremlin resorts to harsh capital controls soon. Default is not out of the question for some of Russia’s almost $700 bln in overseas debt. A surprise proxy war against middle eastern oil fields is not an impossibility, as desperation builds inside the Kremlin.

Conventional wisdom says that Russians have been through far worse times in the past, and have been toughened to adversity. According to the conventional narrative, as stated by the Russian ruling class and Russian media, modern Russians are just as tough as their parents, grandparents, and great-grandparents who lived through the various collapses, wars, and revolutions of Russia’s recent past. But are they really?

George Friedman of Stratfor seems to have been convinced by his Russian contacts that Russia can march bravely through the fire, unburned. An interesting viewpoint, if somewhat credulous and underpenetrating when examining Russians as they are today — as opposed to earlier generations of Russians who survived Hitler and the collapse of the USSR.

These are not your grandfather’s Russian stoics. Putin himself is responsible for much of the decadence and increased dependency on government — for sustenance, decision-making, and basic thinking. Russia and Russians can no longer do or make things for themselves that they need. Russia cannot maintain its own oil & gas production without foreign expertise — let alone develop the large new fields that are waiting to be exploited. It cannot build its own jet, ship, and helicopter engines and rocket/missile guidance systems.

With the loss of Ukrainian and European suppliers, Russia is turning to Chinese producers and Chinese markets for economic survival. But China cannot make up for the massive shortfall of the loss of European trade. And China is not the type of country that you want to depend upon for your very survival — particularly when China covets a large part of Russia’s far east for itself.

Russia’s brain drain is growing worse as its economic future grows darker. Many of the smart and ambitious thinkers and innovators who helped get Russia out of past difficulties have either left the country, or are making plans to do so. Meanwhile, the exodus of Russia’s young and fertile women to Europe and the Anglosphere in search of marriage and family, continues.

Russians have proven that they can suffer. But the visible effects of such suffering on Russia’s age cohorts include an ongoing demographic catastrophe in multiple age groups that has the potential to become much worse.

Polls continue to show Putin enjoys widespread public support. We are somewhat skeptical of the polls because of the implicit intimidation and official censorship of the news. __Economy Watch

It is smart to be skeptical of Russian polls — and any other “information” released by Russian sources. Russia is quickly becoming a massive propaganda machine armed with a massive arsenal of nuclear weapons. In such a case, one quickly learns to pay more attention to what is being done, than what is being said.

More: Russia’s foreign exchange reserves — such as they are — may not survive the next few months of Putin’s crisis:

Russia has driven interest rates to punishing levels and spent at least $87 billion, or 17 percent, of its foreign-exchange reserves trying to prevent a collapse in the ruble from spiraling into a panic. So far, nothing has worked.

… Putin now faces what could be the nation’s most serious economic crisis since 1998, when Russia’s devaluation and default reverberated around the world. U.S. and European sanctions and, more significantly, plummeting oil prices are eroding the reserves that emboldened Putin to annex Crimea despite an international outcry. __ Putin’s Bad Bet

Putin’s reserves are now at or below $370 billion, and rapidly dwindling. But since large portions of Russia’s fx reserves are not liquid, the climax of this drama may be reached earlier than anticipated.

Russia’s neighbors are arming up with tanks and anti-tank missiles. Russia’s neighbors are not particularly fond of the belligerent bear, and remember long periods of atrocities perpetrated against them by Russians and agents of Russia.

2 Responses to On Leaving Well Enough Alone . . .

Cornered, desperate rats fight. The most important thing about the Russian crisis is its nuclear arsenal. The likelihood of nuclear war in Europe is very high, higher than at any time since 1945.

A better US/EU/NATO foreign policy would be a Marshall Plan for Russia. Instead, US/EU/NATO seem to delight in destruction and killing and chaos for the sheer pleasure of it: Sudan, Serbia, Kosovo, Iraq, Afghanistan, Libya, Chad, Mali, Niger, Egypt, Syria … And the US has a President who is literally a serial mass murderer, a true Taliban terrorist.

I’m not sure about all that, but rabid dogs fight even when not cornered. Putin took the suffering in Russia and made it worse. He is expanding the suffering into Ukraine, and who knows where else — all based on a whim of a fantasy of the grand Eurasian Empire, with Tsar Vlad as the emperor.

Russia’s nukes are important to the deepening crisis inside Putin’s eutopia, but I am not certain that Putin or any other Russian in the know truly wishes to put the system to the test.